Under the Microscope: Hydraulic Market Indicators from IEOC

Stats Deep Dive

NFPA’s Industry & Economic Outlook Conference (IEOC) delivers a variety of industry expert-identified indicators for the fluid power industry every year. Whether short-term leading indicators, long-term leading indicators, or coincident indicators, attendees always walk away from this event with quite a few options. But before attendees apply these new resources back at the office, I always recommend ensuring their validity with a tool like NFPA’s Stats Toolkit.

The Stats Toolkit’s Correlation Analysis Report uses lead/lag and correlation analysis to uncover leading indicators as well as relationships between two data series. This makes it one of the best options for those users validating and/or searching for important indicators and drivers. The report not only identifies the correlation percentage between two data series for a specific date range, but also applies a monthly lead/lag effect, which shifts one data series forward in monthly increments in relation to the cross-correlated data series to show how strong or weak the relationship is between the two data series.

Let’s take a look at some of the hydraulic market indicators, using NFPA Hydraulic Shipments data, which was mentioned throughout the 2019 IEOC. These indicators were displayed in a 12/12 ratio format at the event and will be analyzed in the same data format.

 

PMI vs NFPA Hydraulic Shipments

The table below first identifies the lag length between the two data series, then the correlation percentage while applying the lag length, and finally the number of observations (No. Obs.), or number of data points in each data series. The trend graph below gives a visual representation of the two data series plotted together with the optimal lag to correlation.

NFPA Hydraulic Shipments vs PMI

The first indicator is the “Purchasing Managers Index (PMI)” from the Institute for Supply Management, a measure of the prevailing direction of economic trends in manufacturing that is based on a monthly survey of supply chain managers across 19 industries. After examining this relationship, the results are impressive. Not only is 92.5% at a five-month lag length a very strong relationship between these two data series, but it also offers users a valid leading indicator with a five-month lag. You would interpret this relationship as when the PMI increases/decreases from one month to the next, there is a 92.5% chance that NFPA Hydraulic Shipments will experience the same trend five months later.  Validation: Pass

 

U.S. Nondefense Capital Goods New Orders (excl. aircraft) vs NFPA Hydraulic Shipments

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Next up is U.S. Nondefense Capital Goods New Orders (excl. aircraft), an orders data series that originates from the U.S. Census Bureau’s M3 report. Much like the previous indicator, a correlation of 92.3% at a zero lag length demonstrates a very strong relationship, but are coincident and offer no lead. You would interpret this relationship as when U.S. Nondefense Capital Goods New Orders (excl. aircraft) increases/decreases from one month to the next, there is a 92.3% chance that NFPA Hydraulic Shipments will experience the same trend at the same time.  Validation: Pass

 

U.S. Construction Machinery New Orders vs NFPA Hydraulic Shipments

US Construction Machinery New Orders vs NFPA Hydraulic Shipments

Our next indicator is U.S. Construction Machinery New Orders, another orders data series that originates from the U.S. Census Bureau’s M3 report. While not in the nineties, a correlation of 80.7% is still considered a strong relationship. This indicator also offers a short lag of two months. You would interpret this relationship as when U.S. Construction Machinery New Orders increases/decreases from one month to the next, there is an 80.7% chance that NFPA Hydraulic Shipments will experience the same trend two months later.  Validation: Pass

 

U.S. Material Handling Equipment New Orders vs NFPA Hydraulic Shipments

US Material Handling Equipment New Orders vs NFPA Hydraulic Shipments

Our next indicator is U.S. Material Handling Equipment New Orders, another orders data series that originates from the U.S. Census Bureau’s M3 report. Here we have our first indicator with a correlation in the seventies, 73.2% to be exact. This is still considered a good relationship with a very short lag of one month. A general correlation percentage cut-off for a usable indicator is 70.0%. You would interpret this relationship as when U.S. Material Handling Equipment New Orders increases/decreases from one month to the next, there is an 73.2% chance that NFPA Hydraulic Shipments will experience the same trend one month later.  Validation: Pass

 

U.S. Mining Machinery New Orders vs NFPA Hydraulic Shipments

US Mining Machinery New Orders vs NFPA Hydraulic Shipments

Our next indicator is another orders data series that originates from the U.S. Census Bureau’s M3 report, U.S. Mining Machinery New Orders. We’re back in the eighties, with a semi-strong correlation of 80.7% and a nice lag of four months. You would interpret this relationship as when U.S. Mining Machinery New Orders increases/decreases from one month to the next, there is a 80.7% chance that NFPA Hydraulic Shipments will experience the same trend four months later.  Validation: Pass

 

U.S. Machinery New Orders vs NFPA Hydraulic Shipments

US Machinery New Orders vs NFPA Hydraulic Shipments

This is our last orders data series indicator that originates from the U.S. Census Bureau’s M3 report, U.S. Machinery New Orders, and it shows our strongest relationship yet. With an extremely impressive 96.4% at a one-month lag, this deserves a serious look when working with your company data. You would interpret this relationship as when U.S. Machinery New Orders increases/decreases from one month to the next, there is a 96.4% chance that NFPA Hydraulic Shipments will experience the same trend one month later.  Validation: Pass

 

US Farm Machinery and Equipment Production Index vs NFPA Hydraulic Shipments

US Farm Machinery and Equipment Production Index vs NFPA Hydraulic Shipments

And we’ll wrap-up our indicator validation testing with the U.S. Farm Machinery and Equipment Production Index, a data series that originates from the Federal Reserve Board’s G.17 report. After examining this relationship, the results are disappointing, displaying a much weaker correlation of 59.8% at a zero lag length. This is not a recommended indicator and we would interpret this relationship as when U.S. Farm Machinery and Equipment Production Index increases/decreases from one month to the next, there is a 59.8% chance that NFPA Hydraulic Shipments will experience the same trend at the same time.  Validation: Fail

 

In conclusion, the importance of ensuring the validation of suggested indicators should be held in high regard. Many economic events and resources may propose the use of certain indicators, but until you run them through the proper validation testing, proceed with caution when using them to make any major business decision.

Important Reminder – Please notice that this analysis has been conducted using Total Hydraulics shipments data and does not mean that the same relationship will be maintained by your company. Further analysis using your company data will be required to verify the relationships of these and other economic indicators.

While the analysis above was performed using NFPA’s Stats Toolkit, the industry data can be accessed through participation in NFPA’s Confidential Shipment Statistics (CSS), and a variety of economic indicator data can also be accessed in NFPA’s Customer Market File (CMF). A full list of NFPA market information resources is available HERE.

Questions? Contact Eric Armstrong at earmstrong@nfpa.com or (414) 778-3372.  Eric Armstrong also offers a free Stats Toolkit Walk-Through Webinar for those individuals who would like a detailed walk-through of this valuable tool.